On May 9, 1991 the United States of America (FmHA) obtained a judgment for foreclosure
and sale of the debtor' residence and dairy farm in Iowa County, Wisconsin. The Judgment
granted the defendants, Jerry K. Erickson, Patricia C. Erickson, Hinckley State Bank, and
the First National Bank of Blanchardville, sixty days to redeem the property for
$606,795.25. No one redeemed the property during the sixty days. The judgment
"forever barred and foreclosed [defendants] of all right, title, interest and equity
of redemption in said mortgaged premises, except the right to redeem the same before sale
as provided herein."

On March 23, 1992 the debtor, Jerry K. Erickson, filed this chapter 12 bankruptcy case.
The foreclosure sale of the Iowa County property, which was scheduled for March 24, 1992,
did not take place.

On April 15, 1992, the United States filed a motion for relief from the automatic stay,
alleging that the debtor has no equity in the property. The debtor acknowledges that the
property is worth somewhere between $200,000.00 and $220,000.00. A preliminary hearing was
held on May 11, 1992. The motion for relief from stay was denied.(1)
However, the parties were invited to brief the merit of the United States' argument,
expressed during the hearing, that the debtor is unable to deal with the property in his
chapter 12 case because the sixty day redemption period specified in the district court
judgment has expired.

The United States contends that "the debtor is unable to propose a confirmable
Chapter 12 plan incorporating the subject real estate because he is not able to redeem
said property at this time. Therefore, the United States is entitled to relief from
stay." The United States failed to state whether it believes itself entitled to
relief from the stay under 11 USC § 362(d)(1) or (d)(2), or to employ the language of
either subsection in its argument.(2)

The United States contends that because the debtor failed to redeem the property as
provided in the United States District Court's judgment, he is "forever barred and
foreclosed of all right, title, interest and equity of redemption." In support of its
position, the United States relies on U.S.A. v Molitor, et al., 91-C-308-C (WD Wis,
April 13, 1992).

In Molitor, a judgment of foreclosure was entered against the Molitors. Although
the terms of the judgment gave the Molitors sixty days within which to redeem the
property, the Molitors failed to do so, and the property was sold at public sale. Prior to
the hearing on confirmation of the sale, the Molitors filed for protection under the
Bankruptcy Code. At the hearing, the district court directed the parties to brief the
effect of the bankruptcy proceeding on the government's motion to seek confirmation of the
sale. The motion was referred to the magistrate, who recommended denial of the motion
pending bankruptcy court determination that the government was entitled to relief from the
automatic stay. The district court thereafter adopted the magistrate's conclusions of law
and recommendation as the court's own, and denied the government's motion for confirmation
of sale.(3)

In Molitor, the district court states that "[d]efendants have no right of
redemption in this case," and implies (without engaging in any analysis of bankruptcy
law), that for this reason the government's entitlement to relief from the stay in the
bankruptcy case is a given. The United States now seizes upon Molitor as standing
for the proposition that a district court judgment establishing a period of redemption
renders inapplicable the right to "cure" a mortgage default in bankruptcy. See
11 USC §§ 1222(b)(2), (3), and (5). However, the district court's comments, whatever
their import, are dicta, and the Molitor case must be limited to its holding that
when foreclosure judgment defendants have filed for bankruptcy prior to confirmation of
the foreclosure sale, the party seeking to confirm the sale must obtain relief from the
automatic stay before the order of confirmation of sale may be entered.(4)

The Seventh Circuit Court of Appeals has issued two decisions which have direct bearing
on the issues in the present case. In Matter of Clark, 738 F2d 869 (7th Cir 1984),
the Court considered the issue of whether a debtor who has filed a petition under chapter
13 of the Bankruptcy Code, subsequent to a state court judgment of foreclosure, but prior
to sale of the property, is entitled under 11 USC § 1322 to "cure" a default on
a residential mortgage loan. The Court stated:

Despite the judgment of foreclosure, the
Clarks still had an interest in the property at the time they filed their petition in
bankruptcy, such that the property was part of the estate under 11 U.S.C. §§ 541 and
1307. Under Wisconsin law, a mortgagee has only a lien on the mortgaged property even
after a judgment of foreclosure is entered. Neither equitable nor legal title passes until
the foreclosure sale is held. A judgment of foreclosure "does little more than
determine that the mortgagor is in default, the amount of principal and interest unpaid,
the amounts due to plaintiff mortgagee for taxes, etc. . . . The judgment does not destroy
the lien of the mortgage but rather judicially determines the amount thereof."

[W]e conclude that the power to "cure" a default provided by
§ 1322(b)(5) permits a debtor to de-accelerate the payments under a note secured by a
residential property mortgage. . . . As we have noted, in Wisconsin a judgment of
foreclosure does nothing but judicially confirm the acceleration. Though we do not reach
the question whether the same result obtains in a state in which the effect of a judgment
of foreclosure is different, in Wisconsin such a judgment adds nothing of consequence as
far as § 1322(b) is concerned.

Clark, 738 F2d at 874. The language of chapter 12 is taken from
chapter 13, and Section 1222(b) tracks the language relied upon in Clark.(5)

In Matter of Madison Hotel Associates, 749 F2d 410 (7th Cir 1984), the Seventh
Circuit revisited Wisconsin foreclosure law as it relates to bankruptcy. In Madison
Hotel Associates, the mortgagee obtained an order of foreclosure from the federal
district court, and was directed to submit a form of judgment for the judge's signature.
Before the judgment was submitted, the mortgagor filed a petition under chapter 11 of the
Bankruptcy Code, thereby precluding the mortgagee from obtaining a final judgment of
foreclosure. The district court subsequently overruled the bankruptcy court's holding that
the mortgagee was not "impaired" under the plan, as that term is defined in 11
USC § 1124(2).(6)

The Circuit Court considered the issue of "what effect the district court's order
of foreclosure, entered pursuant to Wisconsin state law, has upon MHA's attempt to cure
the default of its accelerated loan and thereby render Prudential's claim 'not impaired'
under 11 U.S.C. § 1124(2)." Madison Hotel Associates, 749 F2d at 419. After
analyzing the law relating to Section 1124(2), the Court concluded that:

a creditor, holding a final judgment of foreclosure, is not impaired
under section 1124(2) if the debtor's plan of reorganization cures the default of the
accelerated loan before the foreclosure sale actually occurs or before the judgment merges
into the mortgage under state law, thereby transferring title to the mortgagee.

Madison Hotel Associates, 749 F2d at 422. The Court analyzed
Wisconsin case law, including the Clark decision, to determine whether under it a
foreclosure judgment merges into the mortgage. In so doing, it distinguished out-of-state
case law. The Court concluded that:

Prudential's failure to obtain a judgment of foreclosure on its
accelerated loan is of no consequence in this case. Under Wisconsin law, the judgment
would simply represent a judicial determination of the amount due under the accelerated
loan and Prudential would continue to hold only a lien upon MHA's property.

Madison Hotel Associates, 749 F2d at 422-23.

The Court determined that the "contention that the default is not cured under
MHA's plan because Prudential has an order of foreclosure that will not be reduced to
final judgment, directly contravenes the purpose of 11 U.S.C. § 1124(2) to allow a
Chapter 11 debtor to reverse a contractual or legal acceleration." Madison Hotel
Associates, 749 F2d at 424. The Court held that "in light of the fact that
Prudential holds only a lien upon MHA's property, and that MHA's plan of reorganization
satisfies the four-prong test of 11 U.S.C. § 1124(2)," Prudential's claim was
"not impaired." Id., 749 F2d at 424. For this reason, Prudential was
deemed to have accepted the plan for purposes of 11 USC § 1129(a)(8). Id.

The Seventh Circuit's holdings in Clark and Madison Hotel Associates
eliminate any doubt concerning the conclusion which must be reached in this case. In Clark,
the Court held that in a chapter 13 case in which a mortgagee had obtained a judgment of
foreclosure on the debtor's farm, but the property had not been sold prior to filing of
the petition, "'the power to "cure" a default provided by [11 U.S.C.] §
1322(b)(5) permits a debtor to de-accelerate the payments under a note secured by a
residential property mortgage.'" Madison Hotel Associates, 749 F2d at 422,
citing Clark, 738 F2d at 874. Similarly, in Madison Hotel Associates, the
Court determined that, where no foreclosure sale had yet taken place, the district court's
order of foreclosure, entered pursuant to Wisconsin state law prior to the filing of the
debtor's chapter 11 petition, had no effect upon the debtor's plan proposal to cure the
default of the accelerated loan and thereby render the mortgagee's claim "not
impaired" for purposes of Section 1124(2).

In the present case, the debtor filed a petition under chapter 12 of the Bankruptcy
Code, after the district court judgment of foreclosure and sale, but prior the sale of the
property. The judgment of foreclosure "'does not destroy the lien of the mortgage but
rather judicially determines the amount thereof.'" Clark, 738 F2d at 871
(citations omitted). The Clark court held that in Wisconsin, a foreclosure judgment
"adds nothing of consequence as far as § 1322(b) is concerned." Clark,
738 F2d at 874. Nor does a foreclosure judgment add anything of consequence as far as
Section 1222(b), modeled as it is after Section 1322(b), is concerned. Furthermore, Madison
Hotel Associates answers the question of whether, under Wisconsin law, a district
court order of foreclosure precludes a debtor's right under the Bankruptcy Code to reverse
a contractual or legal acceleration. Madison Hotel Associates makes clear that in
Wisconsin, the debtor retains that right until the foreclosure sale is held,
notwithstanding the district court's order. As the foreclosure sale has not been held in
the case at bar, the debtor retains the right to "cure" the default under
Section 1222(b).(7)

The United States' contention that the debtor is unable to propose a confirmable
chapter 12 plan incorporating the Iowa County real estate cannot be sustained as a matter
of law. Because the debtor does not lack the legal capacity to propose a confirmable
chapter 12 plan, and there is no factual predicate advanced for any other type of
inability to propose a confirmable plan, the United States' motion for relief from the
stay was correctly denied. We do not have to guess as to which subsection of Section
362(d) the United States believed itself to be pursuing. Neither would be supported
without its prevailing on the issue herein decided.

The United States additionally contends that "if the debtor is allowed by this
Court to redeem the subject real estate, the debtor may only do so for the full amount of
the foreclosure judgement plus interest, costs and taxes." This issue is not
appropriate for decision in the context of a motion for relief from the stay, but should
be considered in connection with confirmation of the debtor's proposed plan.

END NOTES:

1. 11 USC § 362(e) requires a prompt decision on requests for
relief from the stay by providing that relief will be granted if not promptly denied. In
this case, where there was no apparent chance of success, the relief was denied as a
preliminary matter.

On request of a party in interest and after notice and a hearing, the
court shall grant relief from the stay provided under subsection (a) of this section, such
as by terminating, annulling, modifying, or conditioning such stay--

(1) for cause, including the lack of adequate protection of an
interest in property of such party in interest; or

(2) with respect to a stay of an act against property under subsection
(a) of this section, if-

(A) the debtor does not have an equity in such property; and

(B) such property is not necessary to an effective organization.

3. At the subsequent bankruptcy court hearing, the court ordered the
debtor to pay adequate protection payments and denied the government's motion for relief
from the stay. The government's appeal of this order is currently pending in the district
court.

4. The United States' additional reliance upon 11 USC § 108(b) and Matter
of Tynan, 773 F2d 177 (7th Cir 1985), is misplaced. SeeTynan, 773 F2d
at 178 n 2 ("In the Matter of Clark, 738 F.2d 869 (7th Cir. 1984) is
inapposite because it arose under Wisconsin [rather than Illinois] law, the mortgage
lender opposed the Chapter 13 plan, and no foreclosure sale had occurred before the
Chapter 13 petition was filed.").

notwithstanding paragraph (2) of this subsection, provide for the
curing of any default within a reasonable time and maintenance of payments while the case
is pending on any unsecured claim or secured claim on which the last payment is due after
the date on which the final payment under the plan is due[.]

Section 122(b)(5) provides that:

Subject to subsections (a) and (c) of this section, the plan may--

provide for the curing of any default within a reasonable time and
maintenance of payments while the case is pending on any unsecured claim or secured claim
on which the last payment is due after the date on which the final payment under the plan
is due[.]

6. The Circuit Court explained the district court's basis for
reversal of the bankruptcy court's order:

The district court disagreed with the
bankruptcy court's analysis of section 1124(2). According to the district court,
"MHA's plan impairs Prudential's [the mortgagee's] claim because it does not restore
Prudential's judicially-recognized right to proceed with foreclosure of the real and
personal property of the Concourse Hotel." . . . [T]he district court reasoned that
"[a] judicially-recognized right to foreclosure is something different from a right
to accelerated payments that arises by operation of a contractual provision or of
applicable law." Thus, the district court concluded that "because Prudential's
right to foreclosure does not arise merely from a contractual provision or applicable law
but is created by court order and is not simply a right to accelerated payments which can
be cured, Prudential's claim does not fall within the exception created by §
1124(2)."

Madison Hotel Associates, 749 F2d at 419 (citations omitted).

7. Although Clark and Madison Hotel Associates speak
only in terms of a debtor's power under the Bankruptcy Code to cure a default under
circumstances in which a foreclosure sale has not yet occurred, it should be noted that
under Wisconsin law, it is confirmation of the sale, and not the foreclosure sale itself,
which extinguishes a mortgagor's equity of redemption and passes title to the property. In
Gerhardt v Ellis et al., 134 Wis 191, 114 NW 495 (1908), the Wisconsin Supreme
Court stated:

[A] foreclosure is not completed until the sale on foreclosure is
confirmed. . . . There can be no doubt but that the right to redeem persists at least
until confirmation of sale, unless that right is cut off by statute. . . . It is clear
that the title does not pass until confirmation so as to vest the purchaser with the right
of possession. And it is equally clear that the right of redemption is not barred until
confirmation of the sale.

Gerhardt, 134 Wis at 195-96 (citations omitted). SeealsoBank of Commerce v Waukesha County, 89 Wis 2d 715, 723, 279 NW2d 237 (1979)
("[W]e hold pursuant to the case law and statutory authority reviewed [see Wis
Stat § 846.17], the Bank did not acquire title in the property until June 3, 1974, the
date of the judicial confirmation of the sheriff's sale. Prior to the confirmation of the
sale, the Bank's interests in the property was [sic] limited to that of a lien
holder[.]"); Shuput v Lauer, 109 Wis 2d 164, 174, 325 NW2d 321 (1982)
("[T]he sheriff's sale is not final until the sale is confirmed. In other words,
title to the property does not pass prior to confirmation of the sale."); In re
Lynch, 12 BR 533, 535 (Bankr WD Wis 1981) ("[U]nder Wisconsin law mortgagors
retain an equitable interest, i.e., the right to redeem, until a foreclosure sale is
confirmed pursuant to Wis.Stats. § 846.165.").